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Discussion of Blume, Cogley, Easley,
Sargent, and Tsyrennikov
“Welfare, Paternalism and
Market Incompleteness”
Jonathan A. Parker, July 2013
Key ingredients• Exchange economy with finite-state Markovian
uncertainty: P0• Endowments: ei Bounded aggregate endowment• Identical, time-separable choice functions u
satisfying Inada conditions• Dogmatic heterogeneous beliefs: Pi• Different market structures: – complete markets – bonds only– complete markets with borrowing constraint– complete markets with transaction tax
ResultsNice examples: different belief heterogeneity and true probabilities and different market structures.1.Variance and trends in consumption 2.Drift in consumption3.Initial wealth -- Pessimism and patience4.Complete markets leads to immiseration, so other markets structures can do better5.Sometimes all agents prefer one market structure and welfare criterion prefers another
ResultsTheorems:1.Welfare maximized by no betting on sunspots2.Autarky may dominate complete markets3.With symmetric possible disagreement and patient enough agents, autarky is preferred to complete markets.
1. What about alternative welfare measures?
1. Bayesian all the way2. Brunnermeier, Simsek, Xiong (see also Davila
(Harvard))
My reading is that the qualitative theoretical points would be similar. But not clear for:
3. Counting anticipatory utility in welfare or• Agents that learn from mistakes in long run
2. Can we use this framework in practice?
Two answers.1.Yes, as is.2.Only by relying on data on beliefs and wellbeing to provide a social scientific basis for normative economics (a critique of all welfare economics also)
A quick refresher on theoretical content of revealed preference theory (RPT)
•“Theory” is really philosophy – Actual theory (testable content) only for hypothetical
choices– In practice: functional form assumptions
•Static welfare– Assume choice functions equal welfare functions
•Intertemporal welfare – Caplin-Leahy: no RPT way to measure a correct discount
rate for intertemporal welfare– Typically all Pareto weight on time-0 choices
So we have no scientific basis for intertemporal social welfare functions (yet)
Welfare depends on preferences vs. beliefs
– Assume choice functions do not maximize welfare• So what do we assume?• E.g. care about the future today?
– Beliefs vs. preferences• Identical immiseration possible from preferences or from beliefs
• how do we interpret observed immiseration?• does the source even matter?
Solution:- Survey measures of beliefs (RP impossible)- Survey measures of happiness- => Social scientific foundation for welfare
3. Caveats to the paper’s lessons
A. Paper: “Belief diversity is a fact of life”– Can’t disagree– Dogmatic: important for long run – no feedback– Elimination of beliefs is elimination of a person
• But maybe some tiny bit of learning
B. Preferences: Kogan, Ross, Wang, Westerfield– In frictionless, complete-market exchange economies,
it is false in general that traders with inferior forecasts do not survive
– E.g. patient optimists or (priced) risk-loving optimists